European Markets Rally on Fiscal-Cliff Relief

By

Sara Sjolin And

Nina Bains

Updated Jan. 2, 2013 11:30 a.m. ET

European stock markets posted stellar gains as investors returning from the New Year's break cheered a deal in Washington to avert spending cuts and tax increases widely seen as potentially threatening a U.S. recession.

Late Tuesday, Congress broke a prolonged stalemate, passing legislation that allowed the U.S. to avoid an austerity package that would have taken effect in the absence of a deal. The bill represented the biggest tax increase in two decades and was passed despite objections from conservative Republicans in the House.

In two months, $110 billion in spending cuts delayed by Tuesday's package will again kick in, making another battle in Congress all but inevitable. At the same time, the U.S. will need to increase its borrowing limit, a change that can only be made by Congress.

"We still have upcoming challenges with the debt limit debate, but a lot of people left the stock market, and they need to come back," said
Michael Strauss,
chief investment strategist at Commonfund, in Wilton, Conn. In early afternoon in New York, the Dow Jones Industrial Average was up 222 points, or 1.7%, to 13326, for a second consecutive session of triple-digit gains. The blue-chip Dow had rallied 166 points, or 1.3%, on New Year's Eve, to close out a year of solid returns.

Haven investments such as U.S. Treasury debt, which have been supported by concern that over the so-called fiscal cliff, lost ground. The benchmark U.S. 10-year notes were down 27/32, to yield 1.841% as European markets closed, while March Bunds were down 157 ticks to 144.07 in Germany.

The euro initially rallied, rising well above $1.32, but slipped back to $1.3163, down from $1.3195 late Monday in New York.

Yields on 10-year Spanish and Italian government debt fell to their lowest levels since March 2011 and December 2010, respectively.

Mining stocks, whose performance is closely tied to the overall economy, posted sharp gains in Europe, getting an extra boost from news that manufacturing activity in China continued to expand at a modest pace in December. The Stoxx 600 index for basic resources rose 4.6%.

Copper futures in New York rose to a 10-week high, while oil, another commodity that marches to the global economic drum, was up $1.28 at $93.10 on the New York Mercantile Exchange as European equity markets closed. Oil was above $93 a barrel for the first time since October.

Also on the move, shares of
Nokia
surged 6.8%. Financial-analysis website Seeking Alpha said on Monday that the struggling phone-handset maker could get a much-needed breakthrough in China, where the Lumia phone has proved to be a success.

German car makers, which also are sensitive to growth indications from China, were also on the rise.

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